IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM & SHRI RAJENDRA, AM

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM & SHRI RAJENDRA, AM Reliance Industrial Infrastructure Ltd 5 th Floor, NKM International House 178 Backbay Reclamation Babubhai Chinai Road, Mumbai 400 020 ITA No 69 & 70/Mum/2009 ( Asst Years 2005-06 & 06-07 ) Vs The Additional CIT Range 3(3), Mumbai (Appellant ) (Respondent ) PER VIJAY PAL RAO, JM PAN No AAACR7637P Assessee by Shri Farrokh V Irani Revenue by Sh Abhinay Kumbhar Dtof hearing 13 th March 2013 Dt of pronouncement 5 th, April 2013 ORDER These appeals by the assessee are directed against two separate orders both dated 10102008 of the CIT(A) for the AYs 2005-06 and 2006-07 respectively 2 The assessee has raised the common grounds, except the quantum of disallowance in these appeals The ground raised for the AY 2005-06 are as under: 1The CIT(A) erred in confirming the disallowance made by the JCI) by estimating expenses under section 14A of the Income tax Act, being expenditure incurred in relation to earning of exempt income to the extent of Rs54,77,3311-, while computing income under the normal provisions of the Act (Section 28 to 42 of the Act) and also making consequential adjustments while computing book profits under section 115JB of the Act The Appellant submits that it has not incurred any expenditure in relation to earning such income Therefore, the disallowance of the estimated expenditure ought to be deleted under normal computation of income as well as for computation of book profits under section 115JB of the Act 3 The assessee claimed interest income as well as dividend income being exempt u/s 10(23G) and 10(34) of the I T Act The Assessing Officer has observed

2 that the assessee failed to bring anything on record to substantiate their claim of not incurring expenditure in earning the exempt income Accordingly, the Assessing Officer made disallowance u/s 14A on account of administrative expenses in the ratio of the total income to exempt income The Assessing Officer worked out the disallowance at ` 58,38,117/- for the AY 2005-06 and ` 33,29,753/- for the Assessment Year 2006-07 respectively 31 A similar disallowance was made while computing the book profit u/s 115JB 32 The assessee challenged the action of the Assessing Officer before the CIT(A) The CIT(A) while passing the impugned order has modified the amount of disallowance u/s 14A by applying Rule 8D of the I T Rules and accordingly, the disallowance for the AY 2005-06 was reduced to ` 54,77,331/- and for the AY 2006-07 to ` 24,31,275/- 33 As regards the adjustment of disallowance for computation of book profit u/s 115JB, the CIT(A) has also disallowed the same amount of ` 54,77,331/- and ` 24,31,275/- respectively 4 Before us, the ld AR of the assessee has submitted that when no expenses has been incurred by the assessee for earning the dividend and interest income, then no disallowance is called for In support of his contention, he has relied upon the decision of the Hon ble jurisdictional High Court in the case of Commissioner of Income-tax v General Insurance Corporation of India (No1) reported in 254 ITR 203 and submitted that when the assessee has not incurred any specific expenditure for earning the exempt income, then in view of the decision of the Hon ble jurisdictional High Court, no disallowance can be made u/s 14A

3 5 Alternatively, the ld AR has submitted that a reasonable disallowance may be made restricting 2% of the exempt income on account of administrative expenses In support of his contention, he has relied upon the decision of the coordinate Bench of this Tribunal in the case of M/s Godrej Agrovet Ltd in ITA No1629/Mum/2009 vide order dated 1792010 and submitted that the coordinate Bench of this Tribunal has considered 2% of the exempt income as reasonable disallowance u/s 14A 52 On the other hand, the ld DR has submitted that Rule of apportionment is provided u/s 14A Therefore, even the assessee has not shown any specific expenditure in the books of account; the expenditure incurred for both exempt as well as taxable income has to be apportioned He has relied upon the orders of the authorities below 6 As regards the adjustment on account of the expenditure incurred for exempt income for the purpose of computation of book profit u/s 115JB, the ld AR has submitted that the principles of apportionment provided under sec14a cannot be imported for the computation of book profit u/s 115JB He has relied upon the following decisions: i) Goetze (India) Ltd 32 SOT 101(Del) ii)m/s Bengal Finance & Investments P Ltd ITA No5620/M/2010 dt 3172012 & iii)m/s Essar Teleholding Ltd ITA No3850/Mum/2010 dt 2972011 61 On the other hand, the ld DR has relied upon the orders of the authorities below as well as the decision of the coordinate Benches of the Tribunal in the case of Esquire Pvt Ltd in ITA No 5688/M/2011 vide order dt 2982012

4 62 In rebuttal, the ld AR of the assessee has submitted that in the case of Esquire Pvt Ltd (supra), the Tribunal has not discussed the issue of disallowance of the same amount as disallowed u/s 14A for the purpose of computation of book profit u/s 115J B and only passing remark has been made in the said decision 7 We have considered the rival submissions as well as the relevant material on record Though the authorities below have not given a finding that the assessee has incurred any expenditure exclusively for earning of the exempt income in the shape of interest and dividend; however, section 14A has an implicit principle of apportionment in the cases where the expenditure is incurred for composite/indivisible activity, in which taxation and non taxable income is received The administrative expense is such an expenditure which falls under the category of the expenditure incurred for composite activity Therefore, in view of the decision of the Hon ble jurisdictional High Court in the case of Godrej and Boyce Mfg Co Ltd v Deputy Commissioner of Income-tax, reported in 328 ITR 81, a reasonable disallowance has to be made u/s 14A on account of administrative expenditure Therefore, we consider the alternative plea of the ld AR on this issue 71 In the case of M/s Godrej Agrovet Ltd (supra), the coordinate Bench of this Tribunal vide order dated 1792010( one of us, Judicial Member is the party to the same), has considered and decided an identical issue in para 10 as under: 10 As regards the issue relating to the disallowance out of common administrative expenses u/s 14A raised in ground No 8, it is observed that this disallowance made by the AO at 28,35,440/- on pro-rata basis was restricted by the ld CIT(A) to 13,77,000/- by applying Rule 8D of Income Tax Rules, 1962 As held by the Hon ble Bombay High Court in the case of Godrej Boyce Mfg Co Ltd (ITA No 626 of 2010 dtd 12082010), Rule 8D of the Income Tax Rules 1962 is applicable only prospectively ie from AY 2008-09 As further held by the Hon ble Bombay High Court in the said case, the quantum of disallowance u/s 1 4A for the years earlier to AY 2008-09 has to be worked out by adopting some reasonable method In this context, the ld Counsel for

5 the assessee has submitted that in the earlier years, a similar disallowance made by the AO has been sustained by the id CIT(A) to the extent of 2% of the total exempt income earned by the assessee and the same being reasonable, the assessee has accepted it We, therefore, direct the AO to verify this aspect from the assessment records of the earlier years and accordingly restrict the disallowance out of common administrative expenses to 2% of the total exempt income Ground No 8 of the assessee s appeal is thus partly allowed 72 No contrary decision has been brought before us; therefore, following the order of the coordinate Bench of this Tribunal (supra), we direct the Assessing Officer to restrict the disallowance on account of administrative expenditure u/s 14A to 2% of the total exempt income 8 As regards the addition of the amount of disallowance, as computed u/s 14A while computing the book profit u/s 115JB is concerned, we note that the Delhi Bench of this Tribunal in the case of Goetze (India) Ltd (supra) has held that for computation of adjusted book profit, the provisions of sec14a cannot be imported into clause (f) of the Explanation to sec 115JB 81 A similar view has been taken by the Tribunal in the case M/s Bengal Finance & Investments P Ltd (supra) in para 5 as under: 5We have heard the rival submissions and perused the relevant material on record It is observed that the Assessing Officer added the amount disallowed by him u/s 14A to the tune of ``7884 lakh to the book profit computed u/s 115JB The learned CIT(A) ordered for the deletion of this amount The learned AR has placed on record a copy of the order passed by the Mumbai Bench of the Tribunal in the case of M/sEssar Teleholdings Ltd v DCIT in ITA No3850/Mum/2010 in which it has been held that the amount disallowed u/s 14A cannot be added to the amount of book profit u/s 115JB In this order it has been laid down that unless a particular expenditure is debited to the profit and loss account relating to the earning of exempt income, the same cannot be imported into the computation of book profit as clause (f) of Explanation 1 to section 115JB which only refers to the amount debited to the profit and loss account In reaching this conclusion the Mumbai Bench relied on another order of the Delhi Bench in the case Goetze (India) Ltd v CIT [(2009) 32 SOT 101 (Del)] laying down similar proposition The learned AR has also placed on record one more order passed by the Delhi Bench in the case of Quippo Telecom Infrastructure Ltd v ACIT in ITA No4931/Del/2010 in which it has been reiterated that the amount disallowed u/s 14A cannot be

6 considered while computing book profit u/s 115JB of the Act No contrary decision has been brought on record by the learned Departmental Representative In view of these facts, we are of the considered opinion that the learned CIT(A) was justified in directing that the amount of disallowance u/s 14A cannot be considered while computing book profit u/s 115JB 82 Therefore, it is clear that the amount disallowed u/s 14A cannot be considered while computing the book profit u/s 115JB of the Act There are other decisions of the Tribunal as relied upon the ld AR wherein the Tribunal has taken a similar view 83 As regards the decision in the case of Esquire Pvt Ltd (supra), relied upon by the ld DR, we note that in the said decision, the issue of amount disallowed u/s 14A to be considered while computing the book profit u/s 115JB has not been discussed; but only in the concluding para, while the Tribunal remanded the issue of disallowance u/s 14A has also made a passing reference as under: In case any amount is disallowed u/s 14A, we make it clear that the amount also has to be disallowed under the provisions of sec 115JB 84 Since the issue has been adjudicated after an elaborate discussion by the Tribunal in various decisions referred above; therefore, respectfully following the decisions, as relied upon by the ld AR, we decide this issue in favour of the assessee and against the revenue 9 In the result, the appeal filed by the assessee is partly allowed Order Pronouncement in the Open Court on this 5 th, day of April 2013 Sd/- ( RAJENDRA ) Accountant Member Place: Mumbai : Dated: 5 th, April 2013 Sd/- ( VIJAY PAL RAO ) Judicial Member Raj*

7 Copy forwarded to: 1 Appellant 2 Respondent 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER Dy /AR, ITAT, Mumbai